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AICPA Submits Comments on IRS Uncertain Tax Position Proposal

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On
June 1, the AICPA submitted comments to the IRS on the Service’s
proposal to require certain business taxpayers to disclose
their uncertain tax positions on their tax returns. The
comments raise concerns the AICPA has with the proposal and
make several recommendations to the IRS. In its comments, the
AICPA urges the IRS to withdraw the proposal and focus on
existing disclosure mechanisms that already supply information
to the Service. However, if it does move forward with the
proposal, the AICPA encourages the IRS to change its proposal
so that fewer taxpayers are affected and to rethink its most
burdensome aspects.

Background

On Jan. 26, the
IRS announced it plans to make changes to how certain business
taxpayers report uncertain tax positions (Announcement
2010-9). Under the proposal, business taxpayers with total
assets of more than $10 million will be required to file new
Schedule UTP, Uncertain Tax Position Statement, if they have
one or more uncertain tax positions.

Draft Schedule UTP
was released for comment on April 19 (Announcement 2010-30).
It will be required for 2010 tax years and will require
affected taxpayers that file Forms 1120, 1120-F, 1120-L, or
1120-PC to disclose details about each uncertain tax position.
Uncertain tax positions include tax positions for which the
taxpayer or a related entity has recorded a reserve in its
audited financial statements under FASB Interpretation no. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, or other
accounting standards, and tax positions taken by a corporation
in a tax return for which a reserve has not been recorded by
the corporation or a related party based on an expectation
that the position will be litigated or that IRS administrative
practice is not to examine the position. Taxpayers will also
be required to disclose the maximum amount of potential
federal tax liability attributable to each uncertain tax
position (determined without regard to the taxpayer’s risk
analysis regarding its likelihood of prevailing on the
merits).

Passthrough and tax-exempt entities are excused
from the Schedule UTP filing requirement for 2010, but in
Announcements 2010-9 and 2010-17 the IRS raised the
possibility of requiring such organizations to file Schedule
UTP in the future.

AICPA Concerns

The AICPA’s
concerns about the proposal focus on six areas:

The proposal potentially undercuts the integrity of the
financial statement process;

It will impose an
increased burden and cost on taxpayers substantially
disproportionate to any actual benefit to the IRS;

It will create a new tension among and between
taxpayers, tax advisers and the IRS, and alter the current
self-assessment system;

It will produce
complexity and result in distortions that will impede the
stated IRS goals;

It will disproportionately
impact small businesses; and

It calls for
taxpayer reporting at a higher level than mandated by
Congress.

The AICPA recommends that the IRS
focus on improving its use and management of the substantial
amount of disclosed information that it already possesses,
rather than requiring substantial amounts of new
information.

The AICPA also recommends that the IRS
conduct a pilot program and evaluate the results before
deciding whether to expand the required reporting of uncertain
tax positions.

Financial Statements

While the
IRS’ proposal does not change financial reporting rules, the
AICPA believes it will work at cross-purposes to the financial
reporting rules. The AICPA is concerned that because the IRS
proposal requires disclosure of tax positions for which a
financial statement reserve is required, this may influence
the decision whether to establish a financial statement
reserve. The AICPA recommends that the criteria for disclosing
uncertain tax positions should be based solely on the
technical merits of the tax position, and not on whether the
company has recorded a financial statement reserve. The AICPA
believes this would be more consistent with the IRS’ stated
policy of restraint and would clearly separate uncertain tax
position reporting from decisions made for financial statement
purposes and recorded in tax accrual workpapers.

Increased Burdens and Costs

The AICPA disputes the
IRS’ premise that reporting uncertain tax positions will
involve merely transferring data from financial statements to
the Schedule UTP and believes the actual process will be more
complicated and burdensome. The requirement that taxpayers
disclose the maximum amount of potential federal tax liability
attributable to each uncertain tax position may require a new
set of calculations beyond calculations made for financial
statement purposes. The AICPA requests that taxpayers at least
be allowed to report the results of these calculations as
ranges, rather than requiring specific amounts for each item,
and that they be allowed to use reasonable estimates of the
tax benefits in determining the range.

Further, the
AICPA recommends that the scope of the required disclosures be
narrowed to exclude positions the taxpayer has no intention of
litigating and positions that the IRS has a general
administrative practice of not examining. The AICPA also
recommends that disclosure not be required for items that have
an immaterial effect on federal tax liability or that are
related to timing differences.

Small Business
Impact

The AICPA also feels that the $10 million
threshold should be significantly increased because the
proposal will have a disproportionate affect on small
businesses. Since many small businesses do not have FIN 48
expertise in-house, they will either end up making inadequate
disclosures or be required to spend money to hire an external
adviser to prepare disclosures. The AICPA reports that small
businesses are concerned about the increased costs of audits
and return preparation under the proposal, as well as the
increased IRS scrutiny and liabilities to which inadvertent
omissions will expose them.

To lessen the number of
small businesses affected by the proposal, the AICPA
recommends increasing the threshold to include only taxpayers
who have assets in excess of $50 million and annual gross
receipts in excess of $100 million.

When draft Schedule
UTP was released, passthrough and tax-exempt entities were
excused from the filing requirement for 2010. The AICPA
recommends that passthrough and tax-exempt entities generally
be exempted from the uncertain tax position reporting
requirement.

Proposal Requires a Higher Reporting
Level Than Mandated by Congress

Since Sec. 6662
already requires a taxpayer to disclose tax return positions
for which the taxpayer does not have substantial authority,
the AICPA does not think the IRS should set the disclosure bar
higher than that set by Congress.

Specific
Questions

In addition to its policy recommendations, the
AICPA also answered the eleven specific questions raised by
the IRS in Announcements 2010-9 and 2010-17.

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